When the lender says yes and CMHC says no
Posted on Sep 11, 2012 in Mortgage Market Updates and News
What do you do when your lender approves your file, but the insurer declines it? Many people out there likely don't even know this can happen.. The issue here of course, is that many Realtors and mortgage consumers, just don't know enough about the mortgage qualification process. Lets first address the application process..
When you walk into your bank, or speak to a broker, you will go through the basic application, answer some questions, provide some documents, and then on your end, the next thing you may hear is that you've either been approved or declined. Of course much more happens behind the scenes than the average consumer is aware of. When a client comes to me, I take their application and assess the situation, after discussing with their client what's important to them in terms of prepayment privileges, mortgage product flexibility, lender comforts, etc, I'll submit my application to the lender of our choosing. The lender will first look at the application to determine whether or not it fits their guidelines, and then after underwriting the file, they will either approve or decline.
If the LENDER approves the file (and the client is purchasing with less than 20% down), the lender then sends the file off to either CMHC, Genworth, or Canada Guarantee (our 3 insurers in Canada), for further approval. A mortgage application with a loan to value of 80%+, must be approved and insured by one of the 3 insurers. Typically the lenders follow the insurers guidelines to ensure that if the lender approves, the insurer will also approve, but this isn't always the case. There are situations where a lender will approve a file, and it will be declined by the insurer for one reason or another. Having access to only 3 insurers in Canada, this can be problematic.
If a lender declines your file, and you're working with a mortgage broker, chances are, you have 20+ other options to look at. But on the other hand, if the insurer declines a file, and they always have the right to do so, whether the file fits their guidelines or not, there are only 2 other options. To make things more complicated, not all lenders work with all 3 insurers. So the lender you're working with who has approved your file, may only have access to one insurer (who has declined the file), meaning you may need to switch lenders.
I hope that clarified the process and challenges a bit. Now, what to do when CMHC (and I'm using CMHC as a general term here to mean all 3 insurers) declines your file. Typically the insurer will give some sort of guide as to what they'd like to see in order to have the file approved. Options may include, adding a coborrower or cosigner, increasing the down payment, paying out some debt, etc. A cosigner can be a strong tool in getting a mortgage application approved, someone with either good credit, or strong income, or better yet both! Can push a file that's close to being approved, to an approval. A larger down payment not only decreases debt servicing as it decreases the size of the loan, but it also makes the file stronger as it gives the lender and CMHC more equity in the home. And debt pay out can work, sometimes better than a larger down payment, as it can significantly decrease debt ratios.
If you have 20% down and CMHC is still not approving your file, you need to look at a lender that does not insure conventional (20%+ down payment) mortgages. Many lenders insure all files, whether they're high ratio or conventional. This means you need the CMHC approval no matter how large your down payment. If CMHC won't approve you, you need to look at a lender who doesn't do this.
A broker should be able to take care of all of these choices and strategies for you. For more information call Sharie Marie Francoeur, 250.730.0239 firstname.lastname@example.org
-Sharie Marie Francoeur - Mortgage Professional with TMG The Mortgage Group Canada Inc